Former Managing Director of Goldman Sachs: Accounting Fraud of the Too Big to Fails May Be Worse Than Enron

Nomi Prins – former managing director of Goldman Sachs and head of the international analytics group at Bear Stearns in London – is saying the same thing that financial bloggers have been saying: The giant banks are manipulating their books to make themselves look profitable.

In fact, Prins says that this might be worse than the fraud which occurred at Enron:

Enron was the financial scandal that kicked off the decade: a giant energy trading company that appeared to be doing brilliantly—until we finally noticed that it wasn’t. It’s largely been forgotten given the wreckage that followed, and that’s too bad: we may be repeating those mistakes, on a far larger scale.

Specifically, as the largest Wall Street banks return to profitability—in some cases, breaking records—they say everything is rosy. They’re lining up to pay back their TARP money and asking Washington to back off. But why are they doing so well? Remember that Enron got away with their illegalities so long because their financials were so complicated that not even the analysts paid to monitor the Houston-based trading giant could cogently explain how they were making so much money.

Surely someone with Prins’ financial background can sort out the accounting of the TBTFs?

In fact, no:

After two weeks sifting through over one thousand pages of SEC filings for the largest banks, I have the same concerns. While Washington ponders what to do, or not do, about reforming Wall Street, the nation’s biggest banks, plumped up on government capital and risk-infused trading profits, have been moving stuff around their balance sheets like a multi-billion dollar musical chairs game.

I was trying to answer the simple question that you’d think regulators should want to know: how much of each bank’s revenue is derived from trading (taking risk) vs. other businesses? And how can you compare it across the industry—so you can contain all that systemic risk?

The giant banks have played so many games of massaging numbers (see this), hiding losses off the books (see this) and – as Prins documents – failing to report core data and shuffling things around so that it is impossible to tell what they are doing.

The long-term solution is bringing back Glass-Steagall. Being big doesn’t just risk bringing down a financial system—it means you can also more easily hide things. Remember the lesson from the Enron saga: when things look too good to be true, they usually are.

In addition, Congresswoman Marcy Kaptur, Tarp overseer Elizabeth Warren, prominent economists such as James Galbraith, Simon Johnson, Max Wolff and William Black, and financial experts such as Janet Tavakoli have all said that fraud was a primary cause of the financial crisis.

Galbraith and others say that unless past fraud is prosecuted so that Americans trust that the system is fair, the economy will not stabilize.

By allowing the giant banks’ shenanigans to continue, the government is guaranteeing that the economy cannot truly recover.

Good post GW. I believe this person not only has it right, but is an unlikely source to be talking about it. I am convinced the financial biggies are being looted before they belly up, GS included. Bank profits need new lending to generate the imaginary interest and the capacity of the US real estate market to generate new money is slim and none. BAC mentioned they were going to raise capital and pay off the TARP. This capital will come from existing bank accounts.